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Tribune Company Seeks Bankruptcy Protection

The Tribune Company, the newspaper and television chain that publishes The Los Angeles Times and The Chicago Tribune, filed for bankruptcy protection on Monday.

The move came less than a year after Samuel Zell, a Chicago real estate tycoon, took control of the Tribune chain and took on most of the $13 billion debt burden that now threatens to cripple it in the face of a sinking economy and a collapse in advertising.

Mr. Zell said the company had enough cash to continue operating its 12 newspapers, 23 television stations, national cable channel and assorted other media holdings, and the company insisted that the filing would have no effect on employees’ payroll and benefits, or on the vast majority of their retirement accounts.

But in light of its shrinking cash flow, Tribune decided to file for bankruptcy in a Delaware court, with the urging of some of its major creditors who met with Tribune representatives over the previous three days.

The recession and the shift of advertising to the Internet have hit newspapers with the sharpest drop in advertising revenue since the Depression — Tribune’s papers were down 19 percent in the third quarter — and some major newspapers have defaulted on debt or been put up for sale, with no takers. But Tribune’s problems were made significantly worse by the unusual $8.2 billion deal put together last year by Mr. Zell, which took the company private and nearly tripled its debt load, driving the company deeper into debt than any other major newspaper publisher.

The company has cut its staff and products, deeply and repeatedly, in an attempt to stay ahead of debt payments. In May, it also sold one of its most profitable newspapers, Newsday, to Cablevision for $650 million.

Tribune faces more than $900 million in interest payments over the next year, and a $512 million principal payment due in June.

Tribune filed under Chapter 11 of the bankruptcy code, which allows it to continue operating while negotiating with lenders to try and reduce its interest payments and possibly its debt.

The unusually heavy debt burden means Tribune’s bankruptcy is not a harbinger for the newspaper industry, said Rick Edmonds, a media business analyst at the Poynter Institute. “He took on a huge amount of debt at just the wrong time,” he said of Mr. Zell.

The bankruptcy came together in just a few days, largely to protect the position of banks that hold the bulk of Tribune’s debt, according to people briefed on the talks between them, who were given anonymity because they were not authorized to discuss the matter publicly. Those banks hold Tribune’s senior secured loans — that is, the first in line to be paid in a bankruptcy — but the company also has junior debts, including a $69.55 million payment that was due on Monday.

On Friday, these people said, Mr. Zell called a meeting with the main senior creditors, including Merrill Lynch, JPMorgan Chase, Bank of America, Deutsche Bank and Citigroup, and warned that continuing to pay the junior debt reduced the company’s ability to pay senior creditors later on. In meetings over the weekend, the banks reluctantly advised bankruptcy. The company said it did not make the $69.55 million payment on Monday.

In a note sent to Tribune employees, Mr. Zell cited the state of the industry and the economy, saying, “It has been, to say the least, the perfect storm,” which has made it “extremely difficult to support our debt.” But he did not refer to the role of last year’s deal in creating most of that debt.

Photo

Samuel Zell in 2007.Credit
Hiroko Masuike for The New York Times

The deal created an employee stock ownership plan, which bought all of Tribune’s stock and made the company tax-exempt. That made the employees the titular owners of the company, but they had no say in the matter and have no control over its management. They were promised the possibility of gaining access to their shares and cashing them in several years in the future, but in a bankruptcy, share values are often wiped out.

Mr. Zell, who put up just $315 million of the purchase price, gained control, and the right to buy as much as 40 percent of Tribune’s stock in the future.

A note on an internal Tribune Company Web site said, “All ongoing severance payments, deferred compensation and other payments to former employees have been discontinued and will be the subject of later proceedings before the court.” That made it apparent that employees who recently were laid off or took buyouts would join the long list of unsecured creditors.

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James Gerstenzang, a reporter who left The Los Angeles Times’s bureau in Washington last month, said he was trying to figure out whether he was one of those people. He said he had just sent in the last paperwork to approve his expected buyout payment — 49 weeks of pay, after more than 24 years.

“What, I’m supposed to be shocked that Sam Zell isn’t keeping his word?” he asked. “This was their commitment and their credibility.”

A crucial part of Tribune’s strategy for surviving the next year has been to raise cash by selling the Chicago Cubs and its stadium, Wrigley Field, but that effort has been delayed. The company excluded the Cubs and the stadium from the bankruptcy filing, so that it could press ahead with a sale that it hopes will reap more than $1 billion.

The bankruptcy filing “will take pressure off our operations,” Mr. Zell said in a statement. “This restructuring focuses on our debt, not on our operations.”

But bankruptcy — a rare step for a big newspaper company — calls into question the future shape of a company with more than $4 billion a year in revenue and thousands of employees.

James H. M. Sprayregen, a bankruptcy lawyer at Kirkland & Ellis, said companies will often choose to file for bankruptcy when it becomes clear that they will eventually need protection, even if they are making their debt payments. “It obviously wasn’t an emergency or they would have filed Sunday night,” he said. “They chose a time that was financially advantageous.”

Tribune arranged for $50 million in credit from Barclays, and an agreement with Barclays to continue a $300 million line of credit, on which it has already drawn $225 million.

In addition to the banks, the major creditors listed in the bankruptcy filing are hedge funds that hold Tribune loans. The largest individual creditor listed is Mark H. Willes, former chief executive of Times Mirror, the Los Angeles-based newspaper company bought by Tribune in 2000, who the filing says is owed $11.2 million in retirement benefits and deferred pay.

Mr. Zell took control of the company on Dec. 20, 2007, and installed top managers who, like him, had no background in newspapers. They vowed to shake up the company. But Tribune’s results kept declining like those of the industry as a whole. The company had a profit of $37.1 million in the third quarter — down from $216.8 million in the year-earlier quarter — and a $26.2 million loss on its newspapers.

In the Los Angeles Times newsroom, word of the bankruptcy brought few words of surprise.

“I think people are pretty disgusted by the direction things have gone,” said Mitchell Landsberg, a reporter. “There’s no love lost between the employees here and Sam Zell.”